01706 14 2002 Qms 74 E

Building an Adaptive Enterprise through Customer Focus

A New Business Framework and Approach

October 27, 1999

2

Contents

I. The Sears Story

II. Business Imperatives in the Connected Society

III. The New Business Paradigm

IV. Gap Analysis

V. Actions and Implementation Plan

VI. Key Success Factors

3

The Sears Transformation Story Provides a Valuable Lesson for Samsung

1886 1945 1982 1992 1997 2000

• Founded in 1886, it essentially starting the retail concept of large department stores with a full line of merchandise and catalog business

• Core competencies: its adaptive ability to understand and serve changing consumer needs

• Grew rapidly reaching $1B in sales in 1945 and $41B by 1985

• Became the dominant U.S. department store

• Created “brand power”

• Became too inward-focused, self-absorbed

• Began diversifiying

• Centralized and bureaucratic policies

• Ignoring new breed of competitors

• Results: Losing market share, financial performance declining, shareholder losing confidence

• Brought in a new CEO

• Embarked on a turnaround program :

- focus on core business

-customer focus

-greater local market focus

- improved cost structure and productivity

-organizational and cultural renewal

• Despite huge success, continue to renew and adapt to changing environment, e.g., the connected economy

• Continue to finetune its customer focus

• Continue to refine its value proposition and go-to-market strategies

Birth Growth Leadership Transformation Continuous RenewalInflection Point

Sears & IndustryIndustry

Sears SearsSears ?

4

Sears Defined the American Retail Industry

Source: Company web site, Hoovers, HBR Sears, Roebuck and Co. Stanford Business School Case, 1997, EY Analysis

• First broad scope retailer offering products not readily available to the general public

• Set the “Gold standard” of retailing in US, offering unheard of money-back guarantees and free trial offers

• Grew rapidly reaching $1B in sales in 1945 ($9B in 1998 dollars) and $41B by 1985 ($63B in 1998 dollars)

• One in five Americans shopped at Sears regularly• Employees were extremely loyal, and were rewarded with the best profit-sharing

programs in the country

• Created the catalog industry in US• Undercut profit margin of the “general store” to save money for consumers

• Created “Brand Power” -- Sears became a household name standing for high quality at a fair price

• Sears developed popular private label brand names including Kenmore appliances, Craftsman Tools and Diehard batteries

“Sears is the paragon of retailers. It is number one, in the United States, and number two, three, four and five” - Fortune Magazine, 1960s

“Sears is the paragon of retailers. It is number one, in the United States, and number two, three, four and five” - Fortune Magazine, 1960s

RetailerRetailer

CatalogCatalog

BrandBrand

5

Success Has Made Sears Complacent, However, and it Grew Out of Touch with the Changing Retail MarketplaceCustomer-distant decision making

• Headquarters controlled stores, yet did not work closely enough with them to understand their environment

• Bulletins were written about every process--employees were not allowed to make any decisions

Distracted

• Owned a conglomerate of unrelated companies including Allstate Insurance, Dean Witter Investments, Coldwell Banker Real Estate & Discover Credit Card

Ignored true competition

• Sears was stuck in the past -- they did not catch on to emerging retailing trends

• Did not see Wal*Mart & K-Mart entering into their retail space

• Considered only JC Penney & Montgomery Wards as its competitors

Misjudged target customers

• Thought its target customers were male

• Targeted advertising and promotions towards men

Ineffective performance management

• Employee compensation did not align with corporate objectives

Confused positioning

• Unfocused response to new competition left Sears with an undefined strategy -- it was not a discounter (e.g., Wal*Mart) or a high end department store (e.g., Nordstrom)

• “We didn’t know if we wanted to be a discounter, a department store, a specialty store or a mass merchant” - Arthur Martinez, CEO

Source: Home Furnishings Network, 9/30/96, EY Analysis

6

($4)

($3)

($2)

($1)

$0

$1

$2

$3

1989 1990 1991 1992

Consequently, by the Early 90’s, Sears Had Lost Its Historically Dominant Position

*S&P Retail Index CAGR from 1990-1992Source: Dow Jones, Bloomberg

($ Billions)

Profit Revenue Indexed Stock Price

($ Billions)

CAGR89-9223%

43%-1%-2%

N/ASears

Wal-mart

JC PenneyK-mart

Dayton-Hudson

$0

$10

$20

$30

$40

$50

$60

1989 1990 1991 1992

CAGR89-9229%

-0.4%

4%

3%10%

Sears

Wal-mart

JC Penney

K-mart

Dayton-Hudson

0

1

2

3

1989 1990 1991 1992

CAGR89-9242%

16%*

12%6%6%2%

Sears

Wal-Mart

JC Penney

K-mart

D-H

S&P Retail Index

In 1992, Sears Hired a New CEO, Arthur Martinez, To Turn Around the CompanyIn 1992, Sears Hired a New CEO, Arthur Martinez, To Turn Around the Company

7

Under Martinez, Sears Embarked on a Three-Phased Transformation Process

Transformation(1993-1997)

Growth(Ongoing)

Source: Harvard Business Review, Sears Roebuck & Co. Turnaround, 1998, Company Web Site, EY Analysis

• Hired a new CEO• Stabilized operations to stop

losses

• Refocused on core business• Created a new corporate vision• Determined target customer and designed value

proposition• Launched new ad campaigns• Instituted a new performance measurement system• Implemented comprehensive corporate wide change

management programs

• Continue to refine value proposition and go-to-market strategies

• Continue to improve transformation programs

• Began a new renewal process incorporating new environment--ecommerce

1992 1993 1994 1995 19961997

Rev

enue

s de

clin

ed 9

% to

$52

b, n

et lo

ss o

f $3.

9 B

Sea

rs m

oved

from

dow

ntow

n C

hica

go to

sub

urba

n H

offm

an E

stat

es

Hire

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w C

EO

Rec

ruite

d ne

w S

enio

r E

xecu

tive

Com

mitt

ee

Beg

an 1

00 d

ays

eval

uatio

n pe

riod

Clo

sed

cata

log

busi

ness

Reo

rgan

ized

aro

und

its a

pplia

nce,

hom

e &

aut

omot

ive

busi

ness

Clo

sed

113

depa

rtm

ent s

tore

s &

red

uced

wor

kfor

ce b

y 50

,000

peo

ple

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tifie

d ta

rget

cus

tom

er a

s a

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dle

aged

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ale

Hire

d ne

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de S

ears

& th

e in

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-ret

ail b

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esse

s

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ew m

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ting

cam

paig

n, “

The

Sof

ter

Sid

e of

S

ears

,” w

hich

was

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at w

omen

Exe

cutiv

es’ “

Pho

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Tea

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crea

ted

Com

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ain

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olid

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n st

atem

ents

Cre

ated

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al P

erfo

rman

ce In

dica

tor

(TP

I’s)

to m

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ent o

f mar

ket f

ocus

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y

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rs U

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tives

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esB

egan

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° re

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ess

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ll m

anag

ers

Beg

an “

Lear

ning

Map

” pr

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m to

trai

n al

l ass

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tes

abou

t the

nee

d an

d re

ason

for

tran

sfor

mat

ion

Sim

plifi

ed p

olic

y &

red

uced

bur

eauc

racy

by

intr

oduc

ing

“Fre

edom

& O

blig

atio

ns”

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sure

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cam

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f top

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ood

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targ

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ts (

e.g.

, His

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Gra

nted

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Inte

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anag

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ompe

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ion

Turnaround(1992)

8

The Transformation Began With a New Vision: A Compelling Place to Shop, Work, and Invest

Employees FinancialResults

Customer

Compelling Place to Shop

Compelling Place to Work

Compelling Place to Invest

Satis

fied

empl

oyee

s in

fluen

ce

the

shop

ping

exp

erie

nce

Loyal customers increase

top line growth

Employees rewarded forperformance

Passion for the customer

Source: EY Analysis

People add value Performance leadership

3 Cs and 3 Ps

9

The Initial Vision Was Then Translated into Specific Objectives and Measures

Employees Financial ResultsCustomer

Source: EY Analysis

• Environment for personal growth and development

• Support for ideas and innovation

• Empowered and involved teams and individuals

• Personal growth and development

• Empowered teams

• Great merchandise at great value

• Excellent customer service from the best people

• Fun place to shop• Customer loyalty

• Customer needs met• Customer satisfaction• Customer retention

• Revenue growth• Superior operating

income growth• Efficient asset

management• Productivity gains

• Revenue growth• Sales per square foot• Inventory turnover• Operating income

margin• Return on assets

Ob

ject

ives

Mea

sure

s

10

Sears Rediscovered Its Target Customer

Management perception of target customer:

• Thought target customers were male

• Targeted advertising and promotions towards males

• Core customer:

female

middle class (annual income of $25,000 - $60,000/yr.)

middle age (24-54 yrs. old)

head of household

mostly mothers

Source: HBR Sears, Roebuck and Company Turnaround, 1998; EY Analysis

“This was a big discovery. Unless we made the store more attractive to her, we weren’t going to break out of the box we were in.”

- Arthur Martinez, CEO

Before Discovery

“We had a company run by guys who thought they were in the “dirty fingernails” business of autos and hardware. There was no singular view of Sears target customer.”

- Arthur Martinez, CEO

11

Sears Then Refined Its Value Proposition to Meet the New Target Customer

Product/Services

• Added new departments such as cosmetics and jewelry for women

• Expanded apparel offerings

• Increased national brand products

• Improved underdeveloped sections such as petites

• Increased customer wallet share by offering multiple types of services and products to target customer

Image

• Rolled out the “Softer Side of Sears” advertising campaign, targeting the female customer

• Communicated that Sears is changing--it offers more merchandise than just appliances and hardware

• Renovated fixtures and lighting to give a more classy appearance

Relationship

• Redesigned stores to provide a more contemporary environment

• Expanded selling floor space in stores by redesigning back rooms

• Increased touch points with customers by expanding stores into neighborhoods with hardware and furniture stores

+ +

Source: HBR Sears, Roebuck and Company Turnaround, 1998; EY Analysis

Value Proposition

12

Believing That Employees Are an Important Part of the New Strategy, Sears Invested Heavily in Employees

Communicate StrategyHelp Improve Performance

Match Compensation with Performance

Source: HBR Employee-Customer Profit Chain, 1998 ; HBR Sears, Roebuck and Company Turnaround, 1998; EY Analysis

Employees

Town Hall Meetings• Held sessions in which all

employees met in small groups of around ten

• Learned about the industry, Sears and why Sears needed to transform

Improved Employee Selection• Developed interview selection

tools to help managers hire employees with the correct skill sets

• Determined new skills and attitudes needed to realize the new vision and revised new hire profiles accordingly

Decision-making/Empowerment• Gave front-line employees more

authority to act on their own discretion to provide more responsive service to customers

Improved Training• Opened Sears University to teach

courses essential for the operation of the transformation

• Courses available to managers and above

Decreased Bureaucracy• Decreased bureaucracy by

eliminating cumbersome policies and replaced with broad guidelines called “Freedoms and Obligations”

Stock purchases• CEO was required to invest five times his

salary in Sears stock, and executive board was expected to invest three times their salary

• Top 200 managers had to purchase their salary in stock

Total Performance Indicators (TPIs)• Compensation based on TPIs initially rolle

d out to top 200 managers• Eventually all managers above store level

had compensation based on TPIs• TPIs were broken down with 1/3 based o

n each of employee, customer & financials

Goal sharing• Associates given the opportunity to earn v

ariable incentive pay based on customer satisfaction

13

To Monitor Progress, Sears Developed a Comprehensive Performance Measurement System

• Defined a balanced portfolio of strategic objectives along three critical and complementary perspectives: employee, customer, and shareholder

• Developed a cause-and-effect model of how those objectives influence each other

• Made sure that the model included drivers of future growth (“leading indicators”)

• Used that model to develop key measures (Total Performance Indicators - TPIs) so that measurement would influence behavior

• Wherever possible, defined a quantitative metric for each TPI, and where possible, confirmed statistical correlations in the cause-and-effect change

• Monitored progress against TPIs using individual and shared goals, and used the results to finetune the list of TPIs

• Linked performances against TPIs to compensation, using both individual and group goals and incentives. Compensation was linked to non-financial as well as financial performance, and the three perspectives were given equal emphasis

• Cascaded compensation link from top management (Phoenix team, then top 200 execs, then down through middle management above store level, and finally to management teams in the stores as the TPIs proved themselves). Goal sharing was tried on a test-basis to cascade compensation links to the salesperson level

Measuring Rewarding

Source: EY Analysis

14

LegendLegend

Sears’ New Performance Metrics Measured Impact of Employee and Customer Satisfaction on Financial Results

Source: HBR Employee-Customer Profit Chain of Sears, 1998; HBR Sears Roebuck & Co. Turnaround, 1998; EY Analysis

Employee-Customer Profit Chain

Focus on Employees Focus on Customers Financial Results

Attitudeaboutthe job

Attitudeabout thecompany

Employeebehavior

Employeeretention

Service-----------

Helpfulness

CustomerImpression

Customerretention

CustomerRecommend-

ations

Return on assets

Operating margin

Revenue growth

Merchandise------------

Value

5 unit increasein employee

attitude surveys

Example:

1.3 unit increasein customer

impression surveys

0.5% unit increasein revenue

growth

DRIVES DRIVES

• Rectangles represent survey information

• Ovals represent hard data

• Shading represents measurements collected in the form of Sears total performance indicators

• Solid arrows represent statistically established correlations

• Dotted arrows represent hypothetical relationships

15

This Intense Effort Has Dramatically Improved Results for Employees, Customers, and Investors

0

1

2

3

92 93 94 95 96 97

Sears

Wal-mart

JC Penney

K-mart

Dayton Hudson

60

61

62

63

64

65

66

67

68

69

70

Dec

94

Mar

95

J un

95

Sep

95

Dec

95

Mar

96

J un

96

Sep

96

Dec

96

Mar

97

J un

97

Scores

Total Performance IndicatorsEmployee Scores2

Share PriceMarket Share

S&P Retail Index

1992 = 1

16

Entered into e-Commerce

• Launched Sears.com

• Focusing on appliances first, then will expand into hardware & tools, lawn & garden, and consumer electronics

• Sears aims to be the definitive online source for the homeowner

Reorganized Executive Office

• Created a chief executive office composed of current CEO Martinez and two finance/merchandise specialists

• Will allow Martinez to focus on full line store needs and reduce the number of people reporting to him

Increased Store Sovereignty

• Shifting more control of stores from headquarters to the local stores, so they can better react to their customers’ individual needs

Altered Store Environment

• Hired one of the country’s top fashion photographers to create displays and specialty shops within the department stores

Despite Success, Sears Continues to Renew itself to Adapt to the Changing Environment, e.g., Connected Economy

Source: Context Magazine The Cyberside of Sears, Sept/Oct 1999, Chicago Tribune 9/19/99, Crain’s Chicago Business 9/6/99, Dow Jones, EY Analysis

17

The Sears Story:

Redefinition of Core Business

Vision

Strategy

Go-to-Market Strategy

Value Propositions

Customer

Pe

rfo

rma

nc

e M

an

ag

em

en

t Pe

rform

an

ce

Ma

na

ge

me

ntEmployee Training & Empowerment

Processes

Knowledge Management

Co

mm

un

ica

tionC

om

mu

nic

ati

on

18

Key Success Factors

Leadership

Complete Internal Alignment

Around Strategy

Tireless Execution

Measurement System

Brand Power Long-Term

Perspective

Customer Focus SEARSSEARS

19

Contents

I. The Sears Story



IV. Gap Analysis



20

XXX Has Achieved Market Leadership in Consumer Electronics Worldwide

Fortune magazine ranks XXX as the #5? consumer electronics company in the worldFortune magazine ranks XXX as the #5? consumer electronics company in the world

Birth Expansion Leadership

Revenue & Profit Growth Market Cap Growth Global Market Share Leadership

21

This Success Was Driven Primarily by Superior Operational Excellence Based on the“Make-and-Sell” Approach

• Organized to produce large quantities of products efficiently and sell them to customers whose needs could be assumed, predicted, and controlled

• Characterized by replaceable parts and economies of scale

• Focus on products and processes

• Emphasis on planning and control

Profits Through Product Sales Volume & Cost Cutting

ServiceDistributeAdvertise/Promote

SellPriceMakeDesignProduct

ProcureR&D

Make Product Sell Product

MarketMarket

22

Fundamental Changes Occurring in the Marketplace Are Requiring Samsung to Redefine its Basis for Competition

Time

?

Birth

Renewal

Growth

Leadership

Decline

Value

New Business ModelNew Business Model

Globalization

Value

ConvergenceInternet

Digital

Virtual Community

eCommerce

Open Standard

Example: GE

80-81 86/87 91/92 99/00

Market Share Leadership Productivity Services and Solutions Digital

Inflection Pt

Business Model

Active Inertia

23

The Connected Society Marks the Transition To a New Era of Human History

Evolution of Business

SocialImplication

DefiningApplication

2000195018601750

Industrial Revolution(Age of Civilization)

Transportation Revolution(Age of National Scale

Transportation)

Information Processing Revolution

(Data Processing Age)

Connected Society Revolution

(Networked Society Age)

STEAMENGINE

URBANIZED AND INDUSTRIAL SOCIETY

LINEARITY&

LIFE CYCLEs

TRANSNATIONALRAILROAD

BLURRING

INTEGRATEDCIRCUIT

ACCELERATIONAND

COMPRESSION

INTERNET AND DIGITAL

COMMUNICATION

GLOBALLY CONNECTED SOCIETY AND

ECONOMY

SYNCHRONICITY

“We are in for a revolution”

Source: E&Y The Leadership ConnectionTM Interviews

REGIONAL SPECIALIZATION AND

INTER-REGIONAL TRAVEL

KNOWLEDGEWORKER-BASED

ECONOMY

24

The Connected Economy Is Characterized by Three Key Forces

Intangibles

Services

Products

Customer

Speed

Connection

Source: Blur, 1998

25

These Three Forces Are Destroying Old Solutions. . .

• Markets and industries will be defined in terms of CUSTOMERS rather than products

• Market power will shift from suppliers toward CUSTOMERS

• More reliance will be placed on flexible, customized marketing and INTANGIBLE elements of the value proposition

• Product life cycles will shorten

• The need to choose between a high volume/low cost strategy and a niche/differentiation strategy will disappear

• Maximizing the number of transactions with the same loyal customer by offering a diverse array of products and services will become increasingly important

• The most productive business strategies will be cooperative, not competitive

• Organizations will rely more on decision teams and parallel information processing and less on individual decision-making and sequential information processing

26

11

. . . Leading to Six Rules for Success in the Connected Society.

Source: E&Y Analysis

Focus on desired customersFocus on desired customers

22 Focus on competenciesFocus on competencies

33 Leverage partnershipsLeverage partnerships

44 Identify differentiatorsIdentify differentiators

55 Create hybrid modelsCreate hybrid models

66 Be flexible and agileBe flexible and agile

27

The New Organizational Premise is “Sense-and-Respond.”

Source: Hackel, Stephen, Adaptive Enterprises, Boston:Havard Business School Press, 1999.

MAKE-AND-SELL

Assumption:Predictable change

Goal:Become an Efficient Enterprise

Missionand Policy

Strategy- objective

- plan

Structurefunctional hierarchy

Command and Controlmanagement

system

A Closed System

SENSE-AND-RESPOND

Assumption:Unpredictable change

Goal:Become an Adaptive Enterprise

Context- purpose and bounds- adptative structure

Coordinationof Capabilities- commitmentmanagement

An Open System

InternalFeedback

ExternalSignals

Ad

apti

ng

28

Transitioning to a Sense-and-Respond Organization Requires a Fundamental Shift

Source: Hackel, Stephen, Adaptive Enterprises, Boston:Havard Business School Press, 1999.

Make-and-SellMake-and-Sell Sense-and-RespondSense-and-RespondContinuum

Mindset behind Strategic Intent

Know-How

Process

Organizational Priority

Profit Focus

Operational Concept and Governance Mechanism

Information Architecture

Information Technology Architecture

Market Leader Criteria

Articulation of Strategy

Business as an efficient mechanism for making and selling offers to defined market segments with predictable needs

Embedded in products

Mass Production

Efficiency and predictability

Profit margins on products and economies of scale

Functional and sequential activity

Functionally managed and optimized

Host-centric: hierarachical top-down command and control mgmt system

Share of products and services

Strategy as plan

Business as an adaptive system for responding to unanticipated requests in unpredictable environments

Embedded in people and processes

Modular customization

Invested in capailities and system

Return on investmens and economies of scope

Networked and paralleled activity and teams

Enterprise management of essential information

Network-centric: shadowing the dynamic network of people and teams

Share of customer spending

Strategy as adaptive business design

29

Contents

I. The Sears Story



IV. Gap Analysis



30

The Primary Business Objective for Samsung Is to Increase the Ultimate Value of the Company

MarketValue

Multiple($)

Time

Full Potential

Typical

Financial Performance

Non-financial Performance

31

The Challenge is to Determine How to Manage Company Resources to Create Maximum Financial Outcomes

=Earnings

Revenues

Revenues

InvestedCapital

MarketValue

Earnings

x x

(ProfitMargin)

(CapitalEfficiency)

(Growth / Reliability)

Financial Performance

MarketValue

Multiple($)

Time

Full Potential

Typical

Non-Financial

32

Increasingly, Investors Take Non-Financial Measures into Account When Valuing Companies

MarketValue

Multiple($)

Time

Full Potential

Typical

Financial

Non-financial

• Nearly 40% (50% for high tech firms) of the market valuation of the average company was missing from its balance sheet (1996 Study)

• Non-financial criteria constitute on average 35% of the investor’s decisions

• The more non-financial measures analysts use, the more accurate are their earnings forecasts

Key Findings from Market Studies

Non-Financial Metrics Investors Value Most

1. Execution of corporate strategy

How well does management:• leverage its skills and experience?• gain employee commitment?• stay aligned with shareholder interests?

2. Quality of strategy• Does management have a vision for the future?• Can it make tough decisions and quickly seize opportunities?• How well does it allocate resources?

3. Ability to innovate• Is the company a trendsetter or a follower?• What is in the R&D pipeline?• How readily does the company adapt to changing technologies and

markets?

4. Ability to attract talented people• Is the company able to hire and retain the very best people?• Does it reward them?• Is it training the talent it will need tomorrow?

5. Market share• Is the company capturing the value of the current market?• Is it well-positioned to expand that value in the future?

6. Quality of executive compensation• Is executive pay tied to strategic goals?• How well is it gauged to the creation of shareholder value?

7. Quality of major processes

8. Research leadership• How well does management understand the link between creating

knowledge and using it?

33

Non-Financial Data Have a Direct Impact on ValuationA one unit improvement in the perception of quality of management could represent a 13.2% price premium on share value

Source: Ernst & Young’s Measures That Matter, 1997

Computer Industry Pharmaceuticals Food Industry Oil and GasNon-Financial Criteria

Quality of Management

Quality of Products andServices

Level of CustomerSatisfaction

Strength of CorporateCulture

Quality of InvestorCommunications

Effectiveness of ExecutiveCompensation Policies

Effectiveness of NewProduct Development

Strength of Market Position

1.4%

1.4%

0.0%

0.0%1.3%

0.3%1.3%

0.0%

7.6%13.2%

2.4%9.6%

0.0%4.8%

0.0%2.1%

0.8%1.8%

0.9%2.5%

0.0%3.2%

3.1%7.1%

2.6%4.9%

0.9%3.9%

0.0%

0.0%3.0%

0.5%2.8%

0.6%2.9%

0.3%

4.2%8.8%

5.8%7.2%

0.0%1.3%

0.0%

0.9%

1.1%

2.5%

5.3%7.3%

3.1%

2.5%

2.7%

1.5%

0.4%1.2%

0.9%1.8%

1.2%

6.1%

4.6%

4.4%

1.6%4.1%

7.3%9.3%

15%0% 15%0% 15%0% 15%0%

% Increase in P/E Ratio given a one-unit change in….

Influence On Price Short Term Long Term

34

Therefore, a Compelling New Business Paradigm Should Focus on Measures That Matter, both Financial and Non-Financial

Stock PriceStock Price

ConstituencyBehaviors

Operating Model

Operating Model

VEM

SYSTEMSKNOWLEDGE

C E S I

Customer Investor

Supplier Employee

• Buy• Price• Etc.

• Buy• Hold• Etc.

• Cost• Stocking• Etc.

• Productivity• Wage• Etc.

TIME

PR

ICE

?

?

Allocation of Time and Money

Allocation of Time and Money

AC

BF

E D

11 44

TIME/MONEY

CAUSAL MODEL

Value Invested

Value Returned

Value Invested

22 33

Management Philosophy/

Point of View

Management Philosophy/

Point of View

Cutomer Focus

55

• Calibrate Stock Value Gap

• Model Profile Constituency/Behaviors that Matter

• Create Causal Model/VE Optimization Capability

• Redesign Enterprise Processes/ Overall Architecture

• Transition Enterprise to a Customer Focus Point of View

35

The New Business Paradigm Development Proceeds with the Following Five Steps

Company VisionCompany Vision

Business Strategy

Business Strategy

Value Propositions

Value Propositions

• Who are we and what do we do?

• Where should we go?

• What are our “promises” to:

– customers

– employees

– partners

– investors

Strategic Operation Model

Strategic Operation Model

• How will we get there?

– Business Structure

– Business System

– Organization Structure

Portfolio of Initiatives


• How will we deliver it?

1

2

3

4

5

36

This Effort Addresses Four of the Five Components

Where should we go? How do we get there? How do we deliver it?

Business Strategy Operating Model Portfolio of Initiatives

• A definition: The intentional choice of where, how, and when to compete…

• …resulting in significant (or largely irreversible) commitments of resources — capital or human

• Effective strategy considers marketplace and internal issues, is fact-based, and owned by those responsible for implementation

Framework which defines internal business structures, processes and systems:

• Implementation initiatives focused on improving current business process performance...

• …while maintaining the benefit of a high-touch environment

• …and enabled by information technology, measurement systems, and infrastructure

• High level business unit structure and process structure design

• Business system definition

• Organization structure

What are our “promises”?

Value Propositions

• Develop comprehensive offering for target customers

• Define compelling reasons:

– for employees to work at Samsung

– for partners to work with Samsung

– for investors to invest in Samsung

37

A Customer Driven Organization Performs Six Key Customer Processes

CustomerStrategy

Custom

er

Behav

iors

Cu

sto

me

r E

con

om

ics

Cu

sto

me

r E

con

om

ics

Outcom

e

Mea

sure

s

Del

ive

ryS

tra

teg

y

Know Who Are Your

Customers

Know W

hat

Your

Custo

mer

s Do

Kno

w W

ha

t Y

our

Cus

tom

ers

A

re W

ort

h

Know W

hat

You C

an

Get B

ack

Decide What to Give Your Customers

Deter

mine

How to

Deli

ver

Under

stand

Your

Relatio

nship

with th

e

Custo

mer

Exc

ha

ng

e V

alu

e w

ith

You

r C

usto

me

rs

Capab

ility

Specifi

catio

ns

OpportunityDesign

OpportunityDesign

Opportunity

Iden

tific

atio

n

Opportunity

Iden

tific

atio

n

Identify Target Customers

Develop Offerings

Define go-to-market

strategy

Fulfill P

romises

Determ

ine Custom

er

Lifetime V

alue

Manage custo

mer

relatio

nship

38

Customer Driven Business Framework

VisionVision BusinessStrategy

BusinessStrategy

Offer Development

Offer Development CommunicationCommunication Service &

Support

Service & Support

Customer Strategy

Competencies

Go-to-Market Strategy

Pricing Channel Promotion

Product Design

Brand Strategy

SCMNPD

Customer CareSalesforce

Ad Campaign

Field Services

Processes

Organization Design

Customer Knowledge Management

Performance Metrics

Val

ue P

ropo

sitio

nD

evel

opm

ent

CRM

Op Model

39

What Will It Look Like When Samsung Has Transformed into a Customer Driven Organization?

Product-Focused Customer-Focused

Product Manager Customer Portfolio Manager

Volume, product profitability, market share, customer satisfaction

Lifetime value, product mix, customer profitability, share of wallet, customer retention

Managed by sales region Managed by customer segment or portfolio of individual customers

ManagerRole

Measures

ManagerialScope

Required Knowledge

•Market growth •Pricing studies•Assessment of competitive landscape•Customer satisfaction•Geographic sales breakdown•Brand perception/perception of quality

•Customer’s Lifetime Value•Customer’s current product portfolio•Customer’s point in lifecycle (customer needs)•Customer’s history with company•Customer’s preferred access channel•Cost to acquire, serve and retain

Source: E&Y Analysis

40

What Will It Look Like When XXX Is Customer-Driven?

Activities and Behaviors

• Value propositions defined by key customers/segments for product/service offerings

• Globally integrated and shared customer knowledge management

• Metrics developed to track degree of customer focus

• Customer-focused measures & targets shared by different functions in XXX value chain

• Customer attraction & retention rates tracked

• Share of wallet defined and tracked for key segments

• Customer profitability captured & used to manage customer portfolio

• Pricing & channel actions are no longer reactive, but based on CRM strategy

• New product/service development includes market research, customer and field input, and cross-functional team approach

Results

• Price parity with leading brands for comparable products

• Brand parity in terms of recognition and positive image

• Increased brand equity reflected in above-average performance of XXX stock relative to peer competitors

• Customer attraction & retention rates increase

• Share of wallet increases for key segments

• Customer profitability increases

• XXX profitability, EVA, and ROA increase

41

Measuring Customer Focus in the New Environment

Adapted from: The Balanced Scorecard, Kaplan & Norton, 1996

Leading Indicators (Drivers): Customer Value Proposition

Customer AcquisitionCustomer Acquisition Customer ProfitabilityCustomer ProfitabilityCustomer RetentionCustomer Retention

Customer SatisfactionCustomer Satisfaction

Market and/or Wallet Share

Market and/or Wallet Share

Lagging Indicators (Outcomes): Customer Response

Lead To

Value to Customer Product/Service Attributes Image Relationship= + +

Functionality Price Time BrandQuality

(Examples of measures:)

(Examples of measures:)

(Brand survey rating)

(Share points)

(% new customers in target segments)

(Fully-costed margin in target segments)

(# of repeat sales in target segments)

(CSI)

(Back order rate)

(Relative price ratio)

(Warranty) claims

After-Sales ServiceExamples of attributes:

(External product ratings)

(Response time, problem

resolution rate)

42

Contents

I. The Sears Story



IV. Gap Analysis



43

Marketing IQ Test

1. Businesses in America were reasonably successful during the 1980s, enjoying real growth in sales of 2 percent or more per year.

2. During the coming decade, marketers will earn more profits from new brands than from existing ones.

3. A high share of market in a product category generally leads to economies of scale that result in a high level of profitability.

4. There is little agreement among marketers about what the hot new concept “brand equity” means.

5, A reasonable way to set the marketing budget is to take last year’s figure and adjust for inflation.

6. Line extensions are a very risky way to introduce new products.

7. Focus group interviews are a serious marketing research tool that a manager can safely use to help make serious marketing decisions.

8. Business today invest more money in finding new customers than in further developing current customers.

9. The most profitable customers of a firm are usually its biggest customers.

10. Big companies generally make their marketing decisions after evaluating many alternatives in terms of profitability.

True FalseDon’t Know

44

Marketing IQ Test (Cont’d)

11. The more appealing a new product concept is to prospective buyers, the more likely it is it will be a success.

12. Every company should strive to hold on to all of its customers.

13. Location is the most important determinant of success for a new retail business.

14. One-hundred percent customer satisfaction is not an intelligent business objectives.

15. Media planners at major advertising agencies know a great deal about the relative effectiveness of print, television, and radio advertising.

16. Because pricing is such an important component in the marketing mix, most big companies have a serious pricing strategy based on pricing research.

17. Nielsen’s television rating service--especially the new “people meter”--provides valid information about the number of people watching a particular television program.

18. Consumer and trade promotional programs tend to be more profitable than advertising.

19. Companies cannot quantify the effects of public relations programs. That's one reason why PR is a less valuable components of the marketing mix than advertising or the sales force.

20. Most marketing and advertising programs usually are measured in terms of their profitability.

True FalseDon’t Know

Total:

45

What is Your Marketing IQ?

If you scored: You are:

150 - 160

130 - 149

110 - 129

90 - 109

70 - 89

50 - 69

30 - 49

11 - 29

1 - 10

A marketing genius

A guru, a maven

An up-and-coming consultant

A seasoned professional

A typical marketer

A death-wish marketer

An incompetent

Dangerous to your company

Guilty of malpractice

46

Contents

I. The Sears Story



IV. Gap Analysis



47

An Operating Model Is the Primary Mechanism for "Operationalizing" Business Strategy


Business Strategy Portfolio of Initiatives


Value Propositions

Operating Model

• Develop comprehensive offering for target customers

• Define compelling reasons:

– for employees to work at Samsung

– for partners to work with Samsung

– for investors to invest in Samsung

48

An Operating Model Is the Primary Mechanism for "Operationalizing" Business Strategy


Business Strategy

Operating Model


Framework which defines internal business structures, processes and systems:

• High level business unit structure and process structure design

• Business system definition

• Organization structure


Value Propositions

49

Operating Models Consist of Three Primary Components

• Identification of business unit structure, organized around customers, markets, products, geographies, etc.

• Delineation of dedicated and shared services across business units

• Preliminary evaluation of profit & loss responsibility, revenue responsibility, and cost centers

• Articulation of “rules of engagement” — A.K.A. “How things really get done”

• Organizational Structure describes at a high level all elements of:

- reporting structures

- roles & responsibilities

- jobs & skills

• Design of an organizational structure that is aligned with the strategy and other operating model components

Business Structure

C h art T it le

Strategic Operating Model

CompetenciesCompetencies

Performance Management

Performance Management

Business Processes



Sales

Marketing

Call Center (Service)

Billing Operators

Remittance Processing

System Control Center Ops

Generation

Engineering and Construction

Environmental

Regulatory (Lobbying)Legal Services

Human ResourcesFinance

External AffairsBusiness Planning

Administration

One Operating Business Unit

Regulatory (Lobbying)Legal Services

Human ResourcesFinance

External AffairsBusiness Planning

Administration

Engineering

Environmental Compliance

Transaction Management

Regulatory Compliance

Energy Generation Unit (Genco)

Customer Operations Unit (Disco)

Energy Delivery Unit (Transco)

Low Cost Differentiated Services

By-Product (Ash) Management

Maintenance

Operations

Maintenance

Operations

Customer Service

Product Development

Marketing

Sales

11

Business System22

Organization Structure33

• Clearly identified and defined business system components that support the strategy and the high level business structure

Our focus

50

Operating Model Development: Business System

Competencies (Staffing, Training,

Development)


Development)

Performance ManagementPerformance Management

Business Processes

Knowledge Management &

Information Systems


Information Systems

Cha

nge

Managem

ent

Business Processes

51

Operating Model Development


Development)


Development)


Business Processes


Information Systems


Information Systems

Cha

nge

Managem

ent

Business Processes

52

Competency Modeling and Assessment Methodology

UniversalUniversal

CompetenCompetencycy

ModelingModeling

ProcessProcess

Job/RoleJob/Role

AssessmenAssessmentt

GapGapAnalysisAnalysis HR LinkHR Link

Tactical Organizational DesignTactical Organizational DesignStage 1 Stage 2 Stage 3 Stage 4

Docu

menta

tion R

evie

w/

Docu

menta

tion R

evie

w/

Curr

ent

Sta

te U

nders

tandin

gC

urr

ent

Sta

te U

nders

tandin

g

LIN

KA

GE

Succession/Succession/Career Career PlanningPlanning

SelectionSelection

Training and Training and DevelopmentDevelopment

Performance Performance AppraisalAppraisal

CompensationCompensation

RecruitmentRecruitment

ValidationValidation

53



Development)


Development)


Business Processes


Information Systems


Information Systems

Cha

nge

Managem

ent

Business Processes

54



Development)


Development)


Business Processes


Information Systems


Information Systems

Cha

nge

Managem

ent

Business Processes

55

Performance Management is the Vital Link Between a Company’s Ability to Define its Strategy and Implement It.

StrategyVision

PerformanceManagement Execution

Concrete initiatives to operationalize a firm’s strategy

Execution at all levels consistent with strategy

Measurement Motives

What you measure is what you get.

What you measure is what you get.

It’s not what you expect … it’s what

you inspect.

It’s not what you expect … it’s what

you inspect.If you can measure it,

you can manage it.If you can measure it,

you can manage it.

56

Effective Performance Measurement Systems Capture Both Financial and Non-Financial Value Creation

Strategic DecisionsStrategic Decisions

Financial Markets

Investor Estimates of Future Cash Flows

Investor Estimates of Future Cash Flows

Strategy ExecutionStrategy Execution

Capital Allocations

Share Price

Financial Performance Measurement

Non-Financial Performance Measurement

Company

Market Feedback Loop: Measuring Value

Value Creation

57

Performance Measurement Has Become a Highly Effective Management Tool for Aligning Performance With Strategy, Especially in Rapidly Changing Industries

• communicates the company’s strategic vision down through the organization

• provides a management tool for decision-making

• promotes accountability and follow-up

• provides a mechanism for learning and feedback

• promotes alignment of effort up and down the organization

58

The Balanced Scorecard Has Proven to be a Highly Effective Approach for Both Performance Management and Business Transformation

• As of 1999, more than 50% of Fortune 1000 companies had adopted some version of the Balanced Scorecard (BSC).

• The early adopters of the Scorecard in the early 1990’s have reported satisfaction with what the Scorecard accomplished for them.

- About half used the Scorecard to focus and improve their pursuit of already established financial goals (“run a tighter ship”)

- About half used the Scorecard to bring about a more fundamental business or cultural transformation (“turn the ship around”)

- At least half of the companies viewed the Scorecard as a “resounding success,” and nearly all called their efforts generally successful. All believed the Scorecard helped employees focus on strategic priorities and the leading indicators of financial success and better manage their company’s value chain.

• This compares favorably with failure rates between 65% and 80% for business transformation initiatives with a significant information systems component.

Sources: Balanced Scorecard Collaborative, press release dated February 25, 1999, at www.bsccollaborative.com; Sarah Mavrinac and Michael Vitale, “Where Are They Now? Revisiting the Original “Balanced Scorecard” Firms,” Perspectives on Business Innovation (Ernst & Young Center for Business Innovation), Issue 2, p. 29., Gartner Group.

59

A “Good” Scorecard Tells the Story of Your Strategy

A Strategy is a setA Strategy is a setof hypotheses aboutof hypotheses about

cause and effectcause and effect

Criteria for a Good Balanced ScorecardCriteria for a Good Balanced Scorecard

• Cause and Effect Relationships:– Every measure is a link in a chain of cause and

effect linkages that represent the strategy

• Linkage to Financials:– Every measure ultimately ties to financial

results/EVA

• Emphasis on Performance Drivers:– Focus on factors which create long term value– Establish a balance between leading and lagging

indicators

• Measures that create change– Measures which communicate objectives not

prescribe actions– Measures which cause the organization to redefine

a process or change behavior

• Cause and Effect Relationships:– Every measure is a link in a chain of cause and

effect linkages that represent the strategy

• Linkage to Financials:– Every measure ultimately ties to financial

results/EVA

• Emphasis on Performance Drivers:– Focus on factors which create long term value– Establish a balance between leading and lagging

indicators

• Measures that create change– Measures which communicate objectives not

prescribe actions– Measures which cause the organization to redefine

a process or change behavior

60

At a Personal Level, Understand How Their Actions Impact Economic Value

ILLUSTRATIVE

ILLUSTRATIVE

CapitalCapital

ExpenseExpense

ProductionExpense

ProductionExpense

RawMaterials

RawMaterials

OrderingCosts

OrderingCosts

ErrorsErrors

ClericalErrors

ClericalErrors

RevenueRevenue

AbilityAbility

AdministrationExpense

Facilities

Rents/Occupancy ExpenseExpensed Capital

TransportationPeople

Expense

Confidence

NOPATNOPAT

Sales

Marketing

New ProductDevelopment Inputs

EDI

InventorySpoilage

Bad DataErrors

StaffingConstraints

Equipment

TechnicalErrors

Education

Intellectual Aptitude

Reporting

Warehousing

Cost OfCapital

Cost OfCapital

EVA

61

The Balanced Scorecard Is the Most Comprehensive and Flexible Measurement Framework Available and Best Addresses Today’s Challenges in Performance Measurement and Management

A complete Balanced Scorecard has four fundamental components:

The BalancedScorecard

Framework OfComplementary

Business Perspectives

The BalancedScorecard

Framework OfComplementary

Business Perspectives

A Cause-&-EffectModel That ExplainsHow The Company’sStrategic Objectives

Together Create Value

A Cause-&-EffectModel That ExplainsHow The Company’sStrategic Objectives

Together Create Value

Supporting Processes& Infrastructure

To Implement TheScorecard As A

Business Discipline

Supporting Processes& Infrastructure

To Implement TheScorecard As A

Business Discipline

A Set of Key Measures,Targets, and Accounta-

bilities To GuideProgress Toward Those

Objectives

A Set of Key Measures,Targets, and Accounta-

bilities To GuideProgress Toward Those

Objectives

Four perspectives:

•Financial

•Customer

•Business Processes

•People (Organizational Learning and Growth)

The model helps ensure:

•That the underlying busiess vision is shared by the management team and communicable to the organization

•That the set of strategic objectives that form the basis for the Scorecard work together toward the same strategic goals

•That the Scorecard’s various objectives ultimately contribute to improved financial performance

For each strategic objective:

•One or more Key Performance Indicators (KPIs)

•A target for each KPI

•One or more groups or individuals charged with achieving each target

•Where relevant, designated initiatives to help achieve those targets

Process examples:

•Management Review

•Budgeting

•Performance Review

•Compensation

Infrastructure examples:

•Decision support & reporting systems

•Communication

•Training

62

The BSC Links Strategic Objectives to Measurements Across Four Perspectives

Business Process

To satisfy our customers, in which internal business processes must we excel?

Customer

To satisfy our shareholders, what financial objectives must we accomplish?

The StrategyThe Strategy

Financial

To achieve our strategy, which customer needs must we satisfy?

People

To achieve our strategy, how must the people learn and innovate?

The Balanced Scorecard translates the strategy of a firm into statements of “things the firm needs to do well to be successful.” In its standard form, the Balanced Scorecard defines success

across at least four perspectives: Financial, Customer, Business Process, and People.

Most Scorecards also seek a balance between indicators of current growth (often financial and business measures) and indicators of future growth (typically in the “customer” and “people”

perspectives)

Most Scorecards also seek a balance between indicators of current growth (often financial and business measures) and indicators of future growth (typically in the “customer” and “people”

perspectives)

*Based on the original concepts proposed by David Norton and Robert Kaplan in their 1992 Harvard Business Review article

63

The Balanced Scorecard Defines Strategy As a Set of Hypotheses About Cause and Effect

Increase Customer Increase Customer Confidence in Our Confidence in Our Financial AdviceFinancial Advice

Broaden Broaden Revenue Mix Revenue Mix

Improve Improve ReturnsReturns

Understand Understand Customer Customer SegmentsSegments

Cross-Sell Cross-Sell the Product Linethe Product Line

DevelopDevelopthe Offeringthe Offering

AchieveAchieveEmployee Employee

SatisfactionSatisfaction

Improve Improve Customer Customer

InformationInformation Broaden Skills Broaden Skills (Financial (Financial Planner)Planner)

Align Align Reward Reward SystemSystem

Partial Revenue StrategyIllustrative

Illustrative

Illustrative

Illustrative

64

This Cause and Effect Model Ensures That All Measures Ultimately Drive Financial Indicators

Increase Customer Increase Customer Confidence in Our Confidence in Our Financial AdviceFinancial Advice

Broaden Broaden Revenue Mix Revenue Mix

Improve Improve ReturnsReturns

Understand Understand Customer Customer SegmentsSegments

Cross-Sell Cross-Sell the Product Linethe Product Line

DevelopDevelopthe Offeringthe Offering

AchieveAchieveEmployee Employee

SatisfactionSatisfaction

Improve Improve Customer Customer

InformationInformation Broaden Skills Broaden Skills (Financial (Financial Planner)Planner)

AlignAlignReward Reward SystemSystem

PartialRevenueStrategy

Financial Return on Investment Revenue mix Revenue growth

Customer Customer satisfaction

survey Customer retention Depth of relationship Share of segment

Business Processes Product development

cycle Revenue from new

products Hours with customers Cross-sell ratios

People Employee satisfaction Revenue per employee Strategic info

availability Strategic job coverage Personal goals

alignment

65

PeopleContinue to Attract andRetain Highly-Effective

Workforce

Continue to Attract andRetain Highly-Effective

Workforce

Foster Culture ofInnovation and Risk

Taking

Foster Culture ofInnovation and Risk

Taking

Eliminate Silos andCeilings

Eliminate Silos andCeilings

Provide Challenging and Rewarding WorkProvide Challenging and Rewarding Work

Create a Work Environment of Trust, Teamwork, and IntegrityCreate a Work Environment of Trust, Teamwork, and Integrity

Financial

Customer

BusinessProcess

Retailer Push Consumer Pull

“Profitable Share Growth”

“Be Consumer Brand-of-Choiceand Retailer Preferred Supplier”

“Provide HighQuality, EnhancedMargin”

“New Ideas,Good TeamWork”

MaximizeTotal Return

toShareholders

StrategicallyManage Market

Share

StrategicallyManage Market

Share

Meet or ExceedLong-Term

Corporate EarningsGoals

Meet or ExceedLong-Term

Corporate EarningsGoals

AchieveProductivity andCost Advantage

AchieveProductivity andCost Advantage

Enhance Profitabilityof Business Partners

(Wholesaler,Retailer)

Enhance Profitabilityof Business Partners

(Wholesaler,Retailer)

Be Perceived byConsumers as Having the

Best Value

Be Perceived byConsumers as Having the

Best Value

Enhance BrandEquity, esp.BudweiserTrademark

Enhance BrandEquity, esp. XXXTrademark

Ensure and Promote HighProduct Quality and

Freshness as aCompetitive Advantage

Ensure and Promote HighProduct Quality and

Freshness as aCompetitive Advantage

Help PartnersManage Product Mix

and Availability

Help PartnersManage Product Mix

and Availability

Partner withRetailers to Execute

Win/Win/WinActivities

Partner withRetailers to Execute

Win/Win/WinActivities

Strengthen use ofinformation across theextended supply chain,

including 2nd and 3rd tier

Strengthen use ofinformation across theextended supply chain,

including 2nd and 3rd tier

Understand CustomerTrends to Design Targeted

Pricing, Packaging, andAdvertising/Merchandising

Understand CustomerTrends to Design Targeted

Pricing, Packaging, andAdvertising/Merchandising

Maintain Best-in-ClassMaster Scheduling andDistribution Capability

Maintain Best-in-ClassMaster Scheduling andDistribution Capability

Maintain Consistency inProduction and

Procurement Processes

Maintain Consistency inProduction and

Procurement Processes

Develop CreativeProduction Innovations

Develop CreativeProduction Innovations

Maintain Best-in-ClassInnovative Marketing

Capability

Maintain Best-in-ClassInnovative Marketing

Capability

“Manage andMeasure AcrossValue Chain”

Incorporate Leading Edge Decision Support Systems into Effective Decision MakingIncorporate Leading Edge Decision Support Systems into Effective Decision Making

Provide RightProduct/

Package atRight Place,

at RightTime, at

Right Priceand Margin

For example, a Large Beverage Company

66

A XXX Cause-and-Effect Model Should Show How its Strategic Objectives in All Four Perspectives

BusinessProcesses

BusinessProcesses

PeoplePeople

GrowthGrowth

Customer/ Consumer

Customer/ Consumer

Understand & respondto customer needs

Create a knowledge-sharing culture

Reduce inventory& current

assets

Increase unitvolume

Maximize shareholder value

Hire & developcustomer-focused

employees

Make what you sell,don’t sell what you

make

Empower employees to make decisions closer

to the customer

Increase EVA

Increase price relativeto market leader

Increase customeracquisition & share of wallet

Increase customerretention & lifetime value

Build brand equity

Target keycustomer segments

Develop customerknowledge management

infrastructure

Increasesales-to-asset ratio

Illustrative XXX Cause-&-EffectModel

Increase customerprofitability

Measure & rewardcustomer-focused

behavior

Organize aroundthe customer

Leverage R&D todevelop innovative

digital products that ad-dress customer needs

67

A Balanced Scorecard Includes Objectives, Measurements, and Targets That Promote Change

Example:

Owner/Owner/AccountabilityAccountability

Owner/Owner/AccountabilityAccountability

Finance Director CEO Business

Development Manager

Finance Director CEO Business

Development Manager

TargetsTargetsTargetsTargets

Top 10% of FTSE companies each year

RPI + X% annually 25% in three years

Top 10% of FTSE companies each year

RPI + X% annually 25% in three years

MeasurementsMeasurementsMeasurementsMeasurements

% dividend growth Operating Margin Revenue from new

services

% dividend growth Operating Margin Revenue from new

services

BusinessBusinessObjectivesObjectives

BusinessBusinessObjectivesObjectives

Shareholder value Profit New revenue

Shareholder value Profit New revenue

PerspectivePerspectivePerspectivePerspective

ShareholderShareholderRequirementsRequirements

ShareholderShareholderRequirementsRequirements

Marketing Director Business

Development Manager Marketing Director

Marketing Director Business

Development Manager Marketing Director

Number one customer rating

$Xm in five years Number one customer

rating

Number one customer rating

$Xm in five years Number one customer

rating

Value for money Profits from alliances Customer satisfaction

Value for money Profits from alliances Customer satisfaction

Differentiation Strategic alliances Customer service

Differentiation Strategic alliances Customer serviceIndustry/Industry/

CustomerCustomerPositioningPositioning

Industry/Industry/CustomerCustomer

PositioningPositioning

Chief Operating Officer

Research and Development Manager

Marketing Director

Chief Operating Officer

Research and Development Manager

Marketing Director

Best-in-class within five years

Reduced by 50% in two years

60% within one year

Best-in-class within five years

Reduced by 50% in two years

60% within one year

Revenue/work hour Product development

cycle time Number of initiatives

targeted at profitable segments

Revenue/work hour Product development

cycle time Number of initiatives

targeted at profitable segments

Productivity New product

development Segmentation

Productivity New product

development Segmentation

Human Resources Director

Business Development Manager

CEO

Human Resources Director

Business Development Manager

CEO

Treble in three years 10 in five years 20% in two years

Treble in three years 10 in five years 20% in two years

Management span of control

Number of “learning partnerships”

% management time interfacing with customers

Management span of control

Number of “learning partnerships”

% management time interfacing with customers

People policy Alliance

management Customer focus

People policy Alliance

management Customer focus

Business Business ProcessesProcessesBusiness Business ProcessesProcesses

PeoplePeoplePeoplePeople

68

A Properly Designed Process Will Avoid the Common Pitfalls of Most “Home Grown” Balanced Scorecards

Institutionalizing a Dysfunctional Institutionalizing a Dysfunctional ProcessProcess

Institutionalizing a Dysfunctional Institutionalizing a Dysfunctional ProcessProcess

Failing to Articulate Strategic IntentFailing to Articulate Strategic IntentFailing to Articulate Strategic IntentFailing to Articulate Strategic Intent Creating Unbalanced MeasurementCreating Unbalanced MeasurementCreating Unbalanced MeasurementCreating Unbalanced Measurement

Establishing a Rigid Management Establishing a Rigid Management PhilosophyPhilosophy

Establishing a Rigid Management Establishing a Rigid Management PhilosophyPhilosophy

Industry generic, not strategic “Unintegrated’ perspectives What customer values are not def

ined Missing internal, operational link

Industry generic, not strategic “Unintegrated’ perspectives What customer values are not def

ined Missing internal, operational link

Too many measures Unrealistic, unrepeatable Activities instead of measures Misleading All financial

Too many measures Unrealistic, unrepeatable Activities instead of measures Misleading All financial

No executive consensus—not top down

Roll out before completion Tie to incentives prematurely Too many people, too long Lose momentum

No executive consensus—not top down

Roll out before completion Tie to incentives prematurely Too many people, too long Lose momentum

Control, not communication Strategic report vs. strategic

learning agenda For management only

Control, not communication Strategic report vs. strategic

learning agenda For management only

69

In Sum, The Balanced Scorecard Determines:

- What is strategically critical

- What needs to be measured

- How it is to be measured

It also links the boardroom to the back office

70

The Balanced Scorecard’s Metrics and Supporting Processes Are Cascaded Down Through The Organization As Far As Needed, Often to the Individual Hourly Worker

Design Scorecard

ImplementScorecard

Cascade Level I: Corporate

Design Scorecard

ImplementScorecard

Cascade Level II: Business Unit

Design Scorecard

ImplementScorecard

Cascade Level n: Dept. or Team

Design Scorecard

ImplementScorecard

Cascade Level n+1: Individual

71

XXX Performance Management: Major Tasks to Perform

Objective:

Major Activities:

Results:

Ownership:

DesignXXX-Level

Paper-BasedBalancedScorecard

DesignXXX-Level


ImplementBasic XXX-Level


ImplementBasic XXX-Level


DesignGPM-Level


DesignGPM-Level


ImplementBasic GPM-Level


ImplementBasic GPM-Level


ExpandProcess Support

for BalancedScorecard

ExpandProcess Support

for BalancedScorecard

Design enterprise-wide Scorecard framework

•Evaluate XXX vision & strategy

•Define short list of strategic objectives

•Develop cause-&-effect model

•Define measures

•Establish targets

•Develop implementation plan

XXX-level Scorecard defined and launched for executive team

XXX President

Implement enterprise-wide Scorecard framework

•Provide additional training

•Integrate use of Scorecard into management review, budgeting, and planning processes for executive team

•Launch “missing measures” program to develop & collect new measures

•Review and refine model, measures, & targets

•Link to executive compensation

•Communicate Scorecard to rest of organization

XXX-level Scorecard fully institutionalized

XXX President

Design Scorecard framework for each GPM

•Apply XXX vision & strategy

•Define short list of strategic objectives

•Develop cause-&-effect model

•Define measures

•Establish targets

•Develop implementation plan

Scorecards defined and launched for each GPM executive team

Global Product Managers

Implement Scorecard framework for each GPM

•Provide additional training

•Integrate use of Scorecard into management review, budgeting, and planning processes for executive team

•Launch “missing measures” program to develop & collect new measures

•Review and refine model, measures, & targets

•Link to executive compensation

•Identify additional IT requirements

XXX-level Scorecard fully institutionalized

Global Product Managers

Establish full support for automated scorecard & complete cascade to rest of XXX

•Develop & implement executive information system to automate Scorecard mgmt. & reporting

•Confirm how far to cascade the Scorecard (level & geography)

•Launch communication & training program

•Complete the cascade

•Fine-tune measures & targets through use

•Link to compensation

Full Balanced Scorecard implementation

Functional & depart-mental managers

Cascade Level I: Cascade Level II:Expanded

Implementation

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Why Does The Balanced Scorecard Make Sense for XXX?

The Scorecard measures a business’s performance from customer, business process, and employee development perspectives as well as from a financial one.

Until now, XXX has measured itself primarily along financial lines, and to a lesser extent by process measures. However, it now recognizes that it needs to adopt a customer-based perspective, and transform its organization’s and employee’s capabilities to better support a customer focus.

The Scorecard also tries to balance emphasis on drivers of current performance with emphasis on drivers of future growth.

XXX has been very successful recently, but recognizes that it needs to shift its focus to new sources of future growth, and that this will entail changes in how it does business.

The Scorecard is one of the most effective tools available for accomplishing cultural change and business transformation.

XXX realizes that shifting from a product focus to a customer focus will require a fundamental reorientation in company culture, as well as a transformation in the business processes by which XXX develops, positions, and sells its products and responds to its customers’ needs.

The Scorecard is one of the most effective means of communicating a company’s strategic vision down through the ranks of an organization so that each employee understands the strategy and understands how his or her actions should contribute to achieving that vision.

For XXX to become a customer-focused organization, management will have to communicate--continually and consistently--what that will actually mean for day-to-day operations throughout the company.

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Why Does The Balanced Scorecard Make Sense for XXX (continued)?

The Scorecard is holistic: it provides a balanced set of measures for an entire company or business unit, not just for a single initiative or business process.

XXX will need to make changes throughout its entire organization--not just in its marketing process--to focus successfully on its customers. The Scorecard can help each part of the organization understand its role within a customer-driven business.

The Scorecard encourages sharing cross-functional objectives and measures by different groups that need to work together toward a common goal. It discourages distinct parts of an organization from “owning” one key measure and ignoring others as “belonging” to someone else.

To achieve a customer-driven culture in an organization where P&L responsibility is allocated along product lines (GPMs), XXX will need a performance management framework that unites GPMs, Global Marketing, and overseas offices as a team with a common focus on the customer and a shared vision of how to meet customer needs.

The Scorecard assumes that strategic objectives will change over time or need to be fine-tuned, and provides a management review process for doing so.

XXX is entering an era of increased market volatility and shortened strategic planning horizons, and will have to adjust its customer strategy as the connected economy evolves.

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Development)


Development)


Business Processes


Information Systems


Information Systems

Cha

nge

Managem

ent

Business Processes

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Contents

I. The Sears Story



IV. Gap Analysis

